Building a diversified mutual fund portfolio is a good strategy in times of recession. Here are some of the funds that you should include in your holdings.
Federal Bond Funds
There are several types of Federal Bond Funds that are popular among investors who want to avoid risks.
Among the most sought-after funds are US Treasury bonds. These are considered to be the safest. There is no credit risk since the government can levy taxes and print money. This ability gets rid of the risk of default and offer principal protection.
The US government also backs bond funds that are investing mortgage securities by the Government National Mortgage Association.
Municipal Bond Funds
Municipal bond funds are issued by state and local governments. These funds leverage local taxing authority to offer a high degree of security to investors.
They have greater risks than funds that invest in securities backed by the federal government but are still perceived to be relatively safe.
Corporate Funds Taxable
Taxable bond funds coming from corporations are also good bets since they offer higher yields than government-backed bonds. However, they generally carry higher risks.
Choosing a fund that invests in high-quality bond issues will help lower your risk. Corporate bonds are in general riskier than funds that invest in government-backed bonds. However, they are still a lot less risky than stock funds.
Money Market Funds
In terms of avoiding recessions, bonds are definitely among the top picks. However, they are not the only player in the game.
Investors who are super conservative and risk averse often leave their cash in money market funds. Although these funds offer high degrees of safety, they are only ideal for use only for the short term.
Dividend funds are funds that invest in dividend stocks. This goes contrary to the popular belief of the ditching the stock market completely. You don’t necessarily have to abandon the stock market 100%.
Although most investors think of the stock market as a market where growth is a priority, share price appreciation isn’t the only way to earn with stocks.
Mutual funds focused on dividend stocks can also provide robust returns with less volatility than funds that focus strictly on growth.
Utilities mutual funds and funds investing in consumer staples are less aggressive stock fund strategies that usually focus on investing in companies that pay predictable and regular dividends.
Funds that invest in large-cap stocks usually are less vulnerable than those that are investing in small-cap stocks.
That’s because, in general, larger companies are better positioned to endure tough times. Switching assets from funds that invest in smaller, more aggressive companies to those that invest in blue-chip stocks offer a way to protect your holdings against market declines without fleeing the stock market altogether.
For people with deeper pockets, investing a portion of the portfolio in hedge funds is one bet. Hedge funds are created to make money regardless of market conditions.
However, these funds should only represent a small percentage of your total holdings.